THERE is a lot of excitement surrounding cryptocurrencies but we would like to sound a cautionary bell against investing in them.
Unlike other conventional asset classes, a major fundamental shortcoming for crypto is the absence of fundamentals and intrinsic value.
In a traditional sense, intrinsic value would refer to the ’true’ worth of an asset which takes into account fundamental factors and future expectations of the asset.
However, this certainly would not be applicable for crypto as one of its biggest drawbacks would be its inability to generate any form of cash flow or income.
Crypto such as bitcoin do not enjoy a stream of earnings like a company nor does it offer coupon payments like a fixed income instrument. This makes it impossible to formulate a credible and reliable valuation framework let alone derive an intrinsic value.
Furthermore, there is no credible way to derive a proxy value for crypto as it is impossible to map the asset class to any physical asset. This stems from its lack of real-life utility as the asset class is not substitutable as an input for a commercial product.
Greater fool theory
Aside from the lack of cash flow and income, crypto do not have a proven long-term relationship with economic fundamentals unlike equities, fixed income, commodities and even currencies. It is also challenging to establish any reliable relationship, particularly for coins like bitcoin given its speculative and volatile nature.
We liken investing in crypto to the greater fool theory; any investor (or gambler) who subscribes to this theory disregards fundamentals and knowingly buy into overvalued assets because everyone assumes that there will be other greater fools out there who will take the “hot potato” off their hands – netting these investors an “easy” profit” or so they think.
It’s all fun and games until you ended up the final fool – far too much risk to undertake for too little rewards.
Our first gripe about crypto stems from our concerns that investors could easily be buying unknowingly into an asset bubble.
Since there is no way to ascertain if crypto are overpriced (or not) given that absence of intrinsic value, there is no way to tell if investors are buying in at a high or low – essentially reducing any crypto investment into a mere gamble.
Our second gripe with crypto is the inherent difficulty in fitting the asset class into any sound long-term investment portfolios.
The lack of fundamentals and intrinsic value of crypto meant that there is no reliable way to project the future growth of not just individual crypto coin but also that of the broader market.
Sustainability factor
We sound the cautionary bell on extrapolating the total market cap growth of crypto as an asset class to date – such parabolic rate of growth is simply unsustainable in our view.
From a portfolio management perspective, its extreme volatility renders it challenging for long-term financial planning and extremely unreliable as a storage of value.
The massive volatility itself is largely attributable to the way investors view crypto as a whole (a bias unlikely to change in the near-term).
A vast majority of retail investors are buying crypto blindly – driven by fear of missing out (FOMO) – and view crypto as an easy avenue to “get rich quick”.
Last but not least, a key point we believe is not mentioned enough: crypto as an asset class, are largely still in their nascent stage of development. The future of crypto is still highly uncertain – many aspects of crypto (the financial infrastructure surrounding them) are highly experimental at this stage.
In sum, we think crypto’s lack of fundamentals and ultimately an intrinsic value give rise to negative implications as an asset class.
As it stands, there is absolutely no telling how far the current correction will extend. If 2017/2018 serves as a guide, a burst of the crypto bubble – or “crypto winter” – could easily set bitcoin (and the other crypto) back below the US$10,000 level.
In addition to this steep 70% fall in value from current prices, we also see downside risk from a potential monetary tightening as a material headwind weighing on crypto moving ahead. – Jan 29, 2022
iFAST Capital Sdn Bhd provides a comprehensive range of services such as assisting in dealing, investment administration, research support, IT services and backroom functions to financial planners.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
